Remuneration in the Family Business

Remuneration in the Family Business

Who gets what? And how much? Is a conversation most families only have after the death of a loved one. However in a family business, it is one that if not addressed frankly and openly, can be at forefront of everyone’s minds. In my latest column for Bauer Media below I go through the tricky subject of family remuneration and review several common models families employ. David Harland – Family Business Advisor

There are few subjects in a family business as problematical as remuneration. Many family business leaders struggle with the issue of how to fairly compensate their family members who work in the family business. The problem of money is complex in a family business dynamic, since it can be tied up with issues of competition, fairness, approval, and even guilt. However, it’s critical for business leaders to develop a fair remuneration scheme for all employees – family and non-family – to promote an environment of motivation and mutual respect.

Overcompensating family members can lead to an exaggerated sense of self worth and encourage them to lose touch with the economic realities of life. When high salaries don’t come with high levels of responsibilities and performance expectations, children and young relatives may lose confidence in their abilities and feel that they’re still dependent on the family for support.

Undercompensating family members can also negatively affect family harmony and business health. Some business owners purposely underpay children or successors to teach them thrift, on the theory that the business will one day belong to them. These arrangements aren’t fair to family members who may be expected to work long weeks for low wages, while they see opportunities outside the family business pass them by. Low salaries can also leave family members too dependent on the family for their livelihood and build resentment.

Arbitrary salary structures can inflame existing family tensions when relatives believe that someone else is getting a better deal. In an effort to deal with the issue, some business leaders try to equate fair pay with equal pay. However, these habits can create resentment and a sense of injustice among other family members when business responsibilities and levels of productivity are very different.

All employees who work in the business should be paid a fair wage, commensurate with their role in the business, experience, and other market factors.

The advantages of this system include: taking the emotional component out of remuneration; establishing clear roles and expectations for each salary level; equality between family and non-family for the purposes of wages.

Industry benchmarks are an excellent way to establish roles, expectations, and salary levels, ensuring that competitive wages are paid to all employees. Business leaders should concentrate on the market value of the positions being filled and the experience requirements needed, rather than on the needs or wants of family members being employed. Non-family employees are often critical to the success of a family business and remuneration practices that unfairly benefit family members can create resentment among employees and make it difficult to recruit qualified workers.

Separating equity in the business from employment remuneration is important to ensure fair remuneration. It’s common for business leaders to want family members to share in the profits and success of the business. Depending on your firm’s ownership structure, it may be appropriate to give family members equity in the business. Some families choose to apportion shares to non-working members as well as those employed in the business, which can be a simple way to ensure that all family members share ownership, while only those active in the business draw a salary.

Performance appraisals are a good way to ensure that wages remain tied to job roles and productivity and help provide a clear path for promotion. Regular reviews can help managers determine who is productive and who might be in need of training or additional supervision. There’s a risk that over-promoting family members into roles they are not qualified for can be demotivating to non-family employees and damaging to the business. Appraising all employees using the same criteria can help reward excellent performance, ensure that all employees receive training, and career development and create a motivating work atmosphere for all employees.

As with all complex family business issues, there’s never a perfect time to discuss remuneration structures with the family. Even if you have the sense that everyone is on the same page, it’s a good idea to have a frank, honest conversation about money; you may be surprised by how others may feel. Keep in mind that money is a complex emotional issue for most people and underlying family issues of fairness and competitiveness may come up when having this conversation. If you’re concerned that you may not have fair remuneration structures in place, a family business advisor can help you review your existing payment structures and help you develop a transition plan.

If you would like to discuss family business remuneration please call us on 07 3229 7333.